Mark Pittman: Where is this demand coming from? How can you guys sell this issue in thirty minutes? Who the hell’s buying this stuff like that? We’re going to come to the answer that it was going off balance sheet, at least temporarily, and then it might be sold to other customers.

The Audit: So they were buying it themselves and…

Pittman: They were buying it themselves. Yeah. And not every deal. But you know what—it happened enough.

—Ryan Chittum’s interview with the Bloomberg investigative reporter in May 2009. Pittman died unexpectedly the following November.

Ah. Finally.

Two years after the Great Crash of 2008, we are now getting a clearer picture of just how bad it was on Wall Street during the mortgage frenzy’s last years, what might be called the Locust Years.

As the housing market slowed, drying up the market for CDOs, Wall Street banks maneuvered to create, on a huge scale, other CDOs—cat’s paw operations—to buy the CDOs they had already created.

This is not a wonky detail. This Wall Street-created false market for CDOs—a clear, honest-to-goodness flimflam—reverberated all the way down the value chain, down through the Countrywides, the New Centurys and other mortgage boiler-room operators, down through the strip-mall mortgage brokers, down to the strapped subprime borrowers at end of the phone hearing all about the wonders of the Pick-A-Pay Option ARM.

ProPublica and NPR’s Planet Money (in partnership with This American Life)posted an important story last night that rings like a church bell. This is one of the special stories that both bring important new information into the public record and clarify a complex problem, all at the same time. Read this:

Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:

They created fake demand.

You can’t get much clearer than that.

And this wasn’t just on the margins. At one point, two-thirds of all CDOs were being bought by other CDOs. These two paragraphs are well worth reading:

An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs [3].

ProPublica also found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other’s unsold inventory. These trades, which involved $107 billion worth of CDOs, underscore the extent to which the market lacked real buyers. Often the CDOs that swapped purchases closed within days of each other, the analysis shows

ProPublica/Planet Money here build on their own illuminating Magnetar story and on a line work in The Wall Street Journal, the New York Times and elsewhere showing that great financial institutions threw their own standards out the window to keep the bubble going, long after it was clear to bankers that it was headed for a giant crash. This had nothing to do with allocating capital to its most efficient purpose. It was about getting bonuses without regard to consequences, even for their own institutions.

I quote Mark Pittman at the top because he was a financial journalists who surely got the big picture (and he got it very early). The authors of this piece, ProPublica’s Jake Bernstein and Jesse Eisinger can certainly be included on that not-long-enough list.

The culprits in the spotlight here are Merrill Lynch, Citigroup, and Credit Suisse—though Goldman makes a cameo and looks terrible. I’m sure Bear and Lehman will get theirs someday soon. At this point it’s only a matter of time.

The ProPublica/Planet Money story isn’t long—indeed, not a word is wasted—but I can’t resist highlighting a few segments and making a few points:

First, remember, this was about the fees earned from CDO-creation and the compensation (worth the click) earned from the fees.

Keeping the assembly line going had a wealth of short-term advantages for the banks. Fees rolled in. A typical CDO could net the bank that created it between $5 million and $10 million — about half of which usually ended up as employee bonuses. Indeed, Wall Street awarded record bonuses in 2006, a hefty chunk of which came from the CDO business.

Second, without the fake CDO market, there is no demand for junk mortgages generated by boiler rooms. Remember, the fake CDO market was created not to serve the housing market, but because it was slowing down. The renewed demand for CDOs gave new life to the boiler rooms and pushed mortgages to increasingly marginal borrowers.

But the strategy of speeding up the assembly line had devastating consequences for homeowners, the banks themselves and, ultimately, the global economy. Because of Wall Street’s machinations, more mortgages had been granted to ever-shakier borrowers. The results can now be seen in foreclosed houses across America.

Third, we are getting closer to an accountability moment. Names are named. Here’s how an “independent” CDO manager was forced to buy Merrill’s junk:

An executive from Trainer Wortham, a CDO manager, recalls a 2005 conversation with [Merrill CDO chief Chris] Ricciardi. “I wasn’t going to buy other CDOs. Chris said: ‘You don’t get it. You have got to buy other guys’ CDOs to get your deal done. That’s how it works.’” When the manager refused, Ricciardi told him, “‘That’s it. You are not going to get another deal done.’” Trainer Wortham largely withdrew from the market, concerned about the practice and the overheated prices for CDOs.

Ricciardi declined multiple requests to comment.

And that’s not the only name.

Fourth, this story is well-documented and includes, remarkably, on-the-record quotes from the likes of Fiachra O’Driscoll, the co-head of Credit Suisse’s CDO business from 2003 to 2008, the whole time.

Here’s what O’Driscoll says about the supposedly independent CDO managers:

“[T]hey were indentured slaves.”

Fifth, Goldman was not above it:

A little-noticed document released this year during a congressional investigation into Goldman Sachs’ CDO business reveals that bank’s thinking. The firm wrote a November 2006 internal memorandum [10] about a CDO called Timberwolf, managed by Greywolf, a small manager headed by ex-Goldman bankers. In a section headed “Reasons To Pursue,” the authors touted that “Goldman is approving every asset” that will end up in the CDO. What the bank intended to do with that approval power is clear from the memo: “We expect that a significant portion of the portfolio by closing will come from Goldman’s offerings.”

Goldman (formerly an Audit funder) told ProPublica/Planet Money that the CDO manager was independent and the deals were fully disclosed.

Finally, the CDO daisy chain here is shown to have started incredibly early, 2005, and accelerated as the housing market began to fall in mid-2006. In a properly working market, the opposite would be the case.

By March 2007, the housing market’s signals were flashing red. Existing home sales plunged at the fastest rate in almost 20 years. Foreclosures were on the rise. And yet, to CDO buyer Peter Nowell’s surprise, banks continued to churn out CDOs.

“We were pulling back. We couldn’t find anything safe enough,” says Nowell. “We were amazed that April through June they were still printing deals. We thought things were over.”

Instead, the CDO machine was in overdrive. Wall Street produced $70 billion in mortgage CDOs in the first quarter of the year.

Stories like this will help to end once and for all the great and false debate about whether the financial crisis was caused by unpreventable systemic imbalances or whether institutions and individuals can and should be called to account.

The answer of course is both. In the end, as this story shows, it’s not that complicated.

Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014).

Follow Dean on Twitter: @deanstarkman.